THE EVOLUTION OF PROVINCIAL FINANCE IN BRITISH INDIA
A STUDY IN THE PROVINCIAL DECENTRALISATION OF
IMPERIAL FINANCE
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By
B. R. Ambedkar
Sometime Professor of Political Economy at the Sydenham College of
Commerce and Economics, Bombay
Author of " The Problem of the Rupee," " Castes in India," " SmallHoldings in
India and their Remedies "
WITH A FOREWORD BY
EDWIN R. A. SELIGMAN
Professor of Economics, Columbia University, New York
(Reprint of the edition published by P. S. King & Son Ltd. Westminster,
Great Britain, 19251
Dedicated to
HIS HIGHNESS SHRI SAYAJIRAO GAIKAWAD
MAHARAJA OF BARODA
AS A TOKEN OF MY GRATITUDE FOR HIS HELP IN THE
MATTER OF MY EDUCATION
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Contents
Author's Preface
Foreword By Professor Edwin A. Seligman
Introduction—Definition And Outline Of The Subject
PART I
PART II
PART III
PART IV
BIBLIOGRAPHY
PREFACE
For a long time to come students will be saved the conventional
humiliation of making an apology for presenting a study of Indian Finance
or Economics. But it will, on the other hand, be necessary, I fear, for an
equally long period, for them to tender an apology for the shortcomings of
their respective investigations. Even when the treatment of a subject is
analytical, a good analytical study often requires an historical setting.
Unfortunately no spade-work has been done in the field of Indian Finance.
Consequently the difficulties which beset a pioneer in that field are
immense. There is occasionally the difficulty owing to the antecedents of
some point not having been quite completely elucidated. Often there is the
apprehension of some error having crept in, and, when there is hardly
anyone to save the student from it, there is nothing but to smart under a
sense of irritating affliction. Not very seldom does it happen that a pioneer
student is jubilant over his find of material bearing on his subject, but it is
not without a long and wearisome search that he is able to sift the grain
from the chaff. Again, sources sometimes prove false guides, so that a
perusal of them only ends in a considerable waste of time and energy.
Precisely these have been the difficulties besetting the present task.
There are no books to prepare the student for his work and hardly any
savant to lighten his labour or set him on the proper track. Not
withstanding such odds, an attempt is made to make this study thorough
without being too detailed. This has rendered the undertaking quite a
laborious one. But I do not wish to speak of the labour that is involved, nor
do I wish to astonish the reader with what might appear to be a formidable
list of books and documents consulted in the preparation of this
monograph. What I am anxious to speak of are its shortcomings. There
are indeed many of them which a well-versed critic may spot out. It is my
hope that they are not of such a character as seriously to impair the value
which this monograph may otherwise be said to possess. My regrets are
with regard to only a few of them. I have specified a date as to when Local
Decentralisation of Finance commenced in India; but I feel that that date
may not be the earliest and that there may be a date earlier than that one
given by me. I wish I had settled that point finally. But that would have
been a task analogous to that of searching for a needle in a haystack, and
it is doubtful whether the value of that result would have been
commensurate with that labour. Besides, although I am not confident of
my date, my feeling is that later researches may after all confirm my
statement. Another matter which l have not dealt with, but which I would
have liked to have dealt with, was the inter-relation of Provincial and Local
Finance. This I had originally planned to do, but left pursuing it because I
found that the chief subject I was dealing with, namely, the Provincial
Decentralisation of Imperial Finance, began to be overlaid by facts and
arguments not germane to that topic. These shortcomings will, however,
be removed by a supplementary monograph on Local Finance in British
India, which is well under way and which I hope to publish before long.
Occasional repetitions may also be pointed out as a defect of this
monograph. That they should be avoided is all very well. But where
economy in the words of explanation are likely to obscure, repetitions
such as are I unavoidable must be justified, for the interests of clarification
should always outweigh the tedium they involve.
I cannot conclude this preface without thanking Mr. Robinson, the
Financial Secretary at the India Office, for many valuable suggestions and
for the loan of many important documents bearing on the subject. I am
also thankful to Prof. Cannan, of the University of London, who has read
the rough draft of a small part of the manuscript. My debt to Prof.
Seligman, my teacher at Columbia University, is of course immense : for
from him I learned my first lessons in the theory of Public Finance. I am
obliged to my friend Mr. C. S. Deole for assistance afforded in the dreary
task of reading the proofs.
FOREWORD
The problem discussed by Mr. Ambedkar in his excellent dissertation is
one that is arousing a growing interest in all parts of the world. From the
very beginning we find fiscal burdens imposed by both central and local
governments. As soon as there was a political organisation, the conduct
of war on the one hand and the provision of local protection and
convenience on the other called for expenditures on the part of both state
and local authorities. It was only at a later period that there was
interpolated between the local and the central political organisations the
intermediate form which Mr. Ambedkar calls the provincial government.
The names applied to these various classes of expenditure differ with the
authorities themselves. In India, we speak of local, provincial, and imperial
expenditure; in Germany, of local, state, and imperial expenditure; in the
United States and Switzerland, of local, state, and federal expenditure; in
Australia, of local, state, and commonwealth expenditure; in South Africa
and Canada, of local, provincial, and federal expenditure; and in France,
of local, departmental, and general expenditure. In some cases, as in the
British Empire, there is being developed a still more comprehensive class
of expenditures, borne by the empire at large.
The character and importance of these various classes of expenditure
and the relations between them are undergoing a continual change, due
to an alteration in the functions of government. This is itself largely due to
a change in the general economic conditions, resulting in a gradual
modification either of political structure or of administrative activity. In
some countries, as in Canada, Argentine and Brazil, the provinces are
really a creation of the central government; in other countries, as in the
United States, Germany, and Switzerland, the federal government is the
creation of the originally sovereign states. In some countries the
intermediate (provincial or state) government is suffering a loss of
importance as compared with the local or central governments; in other
countries, the reverse is true.
With the increasing pressure of taxation and the development under
modern democracies of augmented governmental functions, the problem
of the equitable distribution of burden among these various forms of
government is becoming more or less acute. What Mr. Ambedkar calls
assignments, assigned revenue, and share revenue, is symptomatic of
the choice of methods in all countries. One of three fundamental plans
must be pursued. Either the central or the provincial government may be
maintained by the other, according to the relative degree of strength : in
former times, in the United States, and in Germany the states were
supposed to support the central government, either wholly or in large
measure; in modern times, in Canada and Australia, the reverse is true.
Or, secondly, distinct revenues may be allocated to the separate
governments : until recently the federal government in the United States,
Germany, and Switzerland was supported primarily by indirect taxes; the
state governments by direct taxes. Or, thirdly, the revenues may be
collected by one government and a portion of the proceeds allotted to the
other : there are many instances of a state or provincial tax being shared
with the federal government, and still more examples of a federal or
central tax being shared with the state or provincial government. In the
United States at present the proper disposition of the inheritance tax as
between state and federal government is fast becoming a burning
question; in Germany the fiscal relations of state and federal government
are in the forefront of political discussion.
The value of Mr. Ambedkar's contribution to this discussion lies in the
objective recitation of the facts and the impartial analysis of the interesting
development that has taken place in his native country. The lessons are
applicable to other countries as well; nowhere, to my knowledge, has such
a detailed study of the underlying principles been made.
It is true that only half of the picture is presented. For the situation has
everywhere been complicated by the entrance of the local authorities into
the field; and by their claims to fiscal consideration as compared with both
state (provincial) and general (federal) demands. In the United States, for
instance, the now widely debated problem of financing the schools is
largely dependent for its solution on the proper answer to be given to the
question of fiscal interrelations. To this question Mr. Ambedkar proposes
to devote himself in a subsequent study. If he succeeds in illumining that
situation as successfully as he here deals with the initial problem, he will
lay us all under still deeper obligations.
EDWIN R. A. SELIGMAN
COLUMBIA UNIVERSITY, NEW YORK,
October, 1924
INTRODUCTION
DEFINITION AND OUTLINE OF THE SUBJECT
A student of Indian Finance has two chief sources of information and
guidance open to him. One is the Annual Budget Statement, and the other
is the annual volume of Finance and Revenue Accounts. Though
separately issued, the two are really companion volumes inasmuch as the
financial Statement forms, so to speak, an exhaustive explanatory
memorandum of the annual financial transactions, the details of which are
recorded in the volume of Finance and Revenue Accounts.
Helpful as these sources are, they are not without their puzzles. A
reference to the latest volume of Finance and Revenue Accounts will
show that the accounts therein are classified under four different
categories:—(1) Imperial, (2) Provincial, (3) Incorporated Local, and (4)
Excluded Local. But this is by no means uniformly so. For instance, a
volume of the same series before 1870 will not be found to contain the
accounts called " Provincial," nor will the accounts styled " Local " be
found in any volume prior to 1863. Similarly, any volume of the Financial
Statements before 1870 will be found to divide the financial transactions
covered therein into—Imperial and Local only. But a volume of the same
series after 1908 curiously enough groups the accounts not under
Imperial and Local but under (1 ) Imperial, and (2) Provincial, while the
financial Statements after 1921 cover only the Imperial Transactions.
Nothing is more confusing to a beginner than the entrance of the new, and
the exit of the old, categories of accounts*[f1]The natural question that he
will ask is, how did these different categories evolve, and how are they
related to one another ?
In the present study an endeavour is made to explain the rise and
growth of one of them, namely, the " Provincial." But in order that there
may be no difficulty in following the argument it is deemed advisable to
preface this study with an outline defining its subject-matter and indicating
the interrelations of the parts into which it is divided. To facilitate a
thorough understanding of the subject the study is divided into four parts,
Comment [f1]: It is surprising that
the category of accounts, called "
Excluded Local," which is to be found
in the volume of Finance and
Revenue Accounts, never appears in
the Financial Statement. The author
has not been able to trace the reason
for its exclusion. In the Madras
Manual (Vol. I, Chapter V, pp. 467-9)
it is argued that the ground for the
exclusion is technical and consists in
the circumstance that the Excluded
Funds are not collected by the
ordinary revenue collecting agency of
the Central Government and are not
subject to its interference. Another
technical ground may also be found in
a ruling given in the third edition of
the Civil Account Code (p. 137),
according to which Funds were called
Excluded, i.e. from the Financial
Statement, because they were not
required to be lodged in the
Government Treasury. But a ruling on
the same point given in the seventh
and latest edition (p. 122) of the same
seems to imply that every public fund
must of necessity be lodged in a
Government Treasury. The more
probable explanation is that given in
the Moral and Material Progress
Report for 1882-3 (Part I, p. 107),
where it is said that these funds have
no place in General Finance because
they " consist chiefly of special trusts
and endowments."
each one dealing with the Origin, Development and Organisation of
Provincial Finance and the final form in which it was cast by the
constitutional changes of 1919. In Part I a somewhat thorny, untrodden
and yet necessary ground has been covered in order to give a complete
idea of the origin of Provincial Finance. While due homage is paid to the
adage which requires students of the present to study the past, nothing
more than the past of the present has been dealt with. In Chapter I, Part I,
an attempt is made to present a picture of the system of Finance as it
existed before the inauguration of the Provincial Finance and to state the
causes that called for a change in its organisation. In Chapter II a rival
system of Finance proposed during the period of reconstruction is brought
to light and shown why it failed of general acceptance. Chapter III is
devoted to the discussion of a plan which was a compromise between the
existing system and its rival, and the circumstances which forced its
reception.
Having explained the Origin in Part I, the Development of Provincial
Finance is made the subject of Part II. How far the arrangement followed
in Part I is helpful must in the absence of anything to compare with it be
left to the opinion of the reader. In regard to Part II, however, it is to be
noted that the arrangement is different from what is adopted in the only
fragmentary sketch published on the subject of Provincial Finance in 1887
by the late Justice Ranade. As will be seen from a perusal of Part II, that
one of the features of Provincial Finance was that the revenues and
charges incorporated into the Provincial Budgets were revised every fifth
year. Justice Ranade in his pamphlet, which simply covers the ground
traversed in Part II of this study, and that too up to 1882 only, has taken
this feature as a norm by which to mark off the different stages in the
growth of Provincial Finance from one to another. Consequently, each
quinquennial period to him becomes a stage, and in his hands the history
of Provincial Finance falls into as many stages as the quinquenniums into
which it can be divided. It may, however, be submitted that if every
revision had changed the fundamentals of Provincial Finance, such an
arrangement would not have been illogical. But as a matter of fact,
Provincial Finance did not change its hue at every revision. What the
revisions did was to temper the wind to the shorn lamb. If the history of
the development of Provincial Finance is to be divided into stages
according to the changes in the fundamental basis thereof, then emphasis
has to be laid on features altogether different in character. Writers on the
theory of Public Finance seem to conceive the subject as though it were
primarily a matter of equity in taxation and economy in expenditure. But to
a Chancellor of the Exchequer finance is eminently practical with a
problem to solve, namely, how to bring about an equilibrium in the Budget.
If we scan the history of Provincial Finance in British India with a view to
discover the method of meeting the problem of equilibrium in Provincial
Budgets and the changes introduced in it from time to time, we shall find
that Provincial Finance has evolved through three distinct stages, each
with its own mode of supply, namely, Assignments, Assigned Revenues
and Shared Revenues. Consequently, instead of following the mechanical
plan of Justice Ranade, it is believed to be more logical and instructive to
divide the stages in the growth of Provincial finance according to the
method of supply to the Provincial Governments adopted by the
Government of India. Consequently, Part II, which deals with the
Development of Provincial Finance, is divided into three Chapters: (1)
Budget
by Assignment, (2) Budget by Assigned Revenues, and (3)
Budget by Shared Revenues.
This discussion of the Origin and Development of Provincial Finance is
followed in Part III by an examination of its Organisation. Chapter VII in
Part lit is devoted to the analysis of the hitherto neglected rules of
limitations on the financial powers of Provincial Governments primarily to
bring out the fact that Provincial Finance was not independent in its
organisation. The analysis of the true position of Provincial Finance is,
however, reserved for Chapter VIII, in which the conclusion is fortified by a
reference to the character of these limitations, that, notwithstanding the
high-sounding appellation of Provincial Finance, there were neither
provincial revenues nor provincial services as separate from Imperial
revenues and Imperial services, so that instead of being federal in its
organisation the system remained essentially Imperial. Chapter IX
discusses how far it was possible to enlarge the scope of Provincial
Finance without jeopardy to the constitutional responsibilities of the
Government of India under the old law.
Part IV is a discussion of the changes introduced into the mechanism of
Provincial Finance by the Reforms Act of 1919. Chapter X of this Part is
devoted to the analysis of the causes which led to these changes. In
Chapter XI a full description of the changes effected by the new law is
given, while Chapter XII forms a critique of the new regime.
In view of the fact that students of Indian Finance ordinarily content
themselves with the phrase " Decentralisation of finance," to indicate
Provincial Finance, a word of explanation in justification of what may
rather be called the too cumbersome title of this study. No student of
Indian Finance, who is sufficiently acquainted with the branching off of the
system in different directions, will fail to mark the inadequacy of the
phrase Decentralisation of Finance to mean Provincial Finance. If there
were in the Indian system only the Provincial Decentralisation there would
have been no necessity to labour for a new title. As a matter of fact, the
starting points of decentralisation are by no means the same, and the
systems evolved through it are quite different in character. For instance,
the centre of decentralisation and the systems evolved by the policy of
decentralisation brought into operation in 1855 were different from the
centre and the systems evolved therefrom by the policy of decentralisation
initiated in 1870. Again, the centre which is gradually being decentralised
since 1892, be it noted, is different from those affected by the
decentralisation of 1855 or 1870. To put it more clearly, the
decentralisation of 1855 was the decentralisation of Indian Finance
resulting in—
(I) the separation of Local from Imperial Finance.
The decentralisation of 1870 was the decentralisation of Imperial
Finance resulting in—
(II) the separation of Provincial from Imperial Finance.
And the decentralisation commencing from 1882 is the
decentralisation of Provincial Finance resulting in—
(III) the separation of Local from Provincial Finance.
Obviously then, " Decentralisation of finance " far from being indicative
of Provincial Finance, is a general name for this variegated and
multifarious process of decentralisation described above, and it cannot but
be confusing to use as a title to the study of one line of decentralisation a
phrase which can be generically applied to all the three lines of
decentralisation distinguished above. In order, therefore, that this study
may not be taken to pertain to a line of decentralisation other than the one
it purports to investigate, it has been thought proper to designate it " The
Evolution of Provincial Finance in British India "with a sub-title, " A Study
in the Provincial Decentralisation of Imperial Finance," where the words
Provincial and Imperial must be read with the emphasis due to them. How
careless the phraseology often is may be instanced by the fact that
Justice Ranade's pamphlet referred to above is styled " Decentralisation
of Provincial Finance." Although it deals with the development of
Provincial Finance, it is likely to be passed over by the student, for its title
implies that its subject-matter must be the growth of Local Finance. If
Justice Ranade had been conscious of the varieties of decentralisation,
he would have probably realised that the title of his pamphlet was false to
its contents.
PART I